How high frequency trading algo goes wild to quant failure losing millions in 4 seconds
This article was very interesting. It shows that one needs to be very careful qhen they let an algorithmic based strategy lose on the markets. Here are some highlights from the article:
Five seconds after the firm turned it on, they had to turn it off. The algo “choked,” after it had already flooded the oil market with orders that made up 4 percent of average daily trading volume in the contract, and caused a brief 1.3 percent jump in oil prices, from $76.60 to $77.60.
The firm turned on the algo on February 3rd 2010 just before close. The following day, perhaps because the orders were unexplained, there was a 5 percent plunge in oil prices. And the day after that, crude fell further, to $71 a barrel, and volume touched a then-record high.
This case is fascinating because the faulty algo’s strategy is explained in detail.
[Infinium Capital Management used a brand new algo] to execute a “lead/lag” strategy between an exchange-traded fund called United States Oil Fund (USO.P), which tracks oil prices, and the U.S. crude benchmark future, West Texas Intermediate.
The algorithm was turned on at 2:26:28 p.m. (Eastern) on Feb. 3, less than four minutes before NYMEX closed floor trading and settled oil prices. It immediately started uncontrollably buying oil futures, according to the documents, which include letters from Infinium’s lawyer to the regulation unit of CME Group, and cite notes from a company developer.
Infinium placed 2,000 to 3,000 orders per second before its flooded order router “choked” and was “dead in the water” a few seconds later, the developer’s notes said. The algorithm was shut down five seconds after it was turned on.
By then, the documents show, the firm had sent 4,612 “buy limit” orders into the market. It quickly offset the position, mostly with large “block” trades in the next few minutes, leaving it with a $1.03-million loss. Infinium’s burst of buying and selling represented about 4 percent of average daily trading volume in the contract, and caused a brief 1.3 percent jump in oil prices, from $76.60 to $77.60, before settling at $76.98, Reuters data show.
Trading volume spiked nearly eight-fold in less than a minute — and the reverberations turned some heads.
The next day, Feb. 4, commodities traders struggled to explain a 5 percent plunge in oil prices, the biggest one-day drop in half a year. On Feb. 5, crude fell further, to $71 a barrel, and volume touched a then-record high.
Apparently Infunium believes the algo one main flaw. It allowed thousands of orders per contract (even though they planned for it to allow one). Another flaw was with Infinium’s computer, which they told Reuters may not have properly recorded the orders.
Infinium’s mistake might be compared to just a fat finger, but they’re currently being investigated for market manipulation (although they probably won’t be found guilty of it). The person or people who designed the algo are no longer at Infinium.
http://www.financialpost.com/news/business-insider/Details+algo+gone+wild+that+caused+trading+mayhem/3442414/story.html?goback=.gde_2107793_member_29378681NOTE I now post my TRADING ALERTS into my personal FACEBOOK ACCOUNT and TWITTER. Don't worry as I don't post stupid cat videos or what I eat!